Sox Corporation purchased a 40% interest in Hack Corporation for $1,500,000 on January 1, 2018. On November 1, 2018, Hack declared and paid $1 million in dividends. On December 31, Hack reported a net loss of $6 million for the year. What amount of loss should Sox report on its income statement for 2018 relative to its investment in Hack?

Question

Quizplus · Accepted Answer

Carrying value before net loss:
($1,500,000 - (40% × $1,000,000)) = $1,100,000
Sox's share of net loss = $6 million × 40% = $2.4 million. Because the investment account cannot be reduced below zero, the loss reported in 2018 would be only $1,100,000.

Sox Corporation Purchased a 40% Interest in Hack Corporation for $1,500,000